Privatisation

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Privatisation

Between the 1930s and 1950s, most of the public
utilities in the UK, such as gas, water, and electricity, were taken
over by the state via a process called nationalisation.

The main motive for nationalisation during this
period was to ensure a
coordinated approach to production and supply to ensure economic
survival and efficiency in the face of war, and post-war reconstruction.

However, by the late 1970s it was becoming apparent
that these utilities, and other state-owned firms, were suffering because:

They were being managed ineffectively and
inefficiently. The
principal-agent problem is highly relevant to
public sector activities. The managers of the utilities were not
required to meet any efficiency objectives of the state, and there
was growing criticism because these industries were protected from
competition, and hence had become increasingly ‘X’ inefficient.

The nationalised industries had no power to
raise capital on the open market. If they needed funds for
investment, they would have to compete with other government spending
departments, like education, health, and defence. This is one
reason why there was considerable under-investment in these
industries.

To resolve these problems and to generate revenue
for the government, many State-owned industries and firms during the late
1970s through to the early 1990s
were sold off to the private sector through a process called privatisation.

The major privatisations in the UK during that period were Rolls Royce motors
(1973) BP (stakes sold off between 1977 and 1987), BA (1987), Steel (1988) and
Coal (1994), and the utilities: gas (1986),
electricity (1990-1995), telecoms (1984-1993) and water (1989).

In the wake of
the financial crisis the
Northern Rock bank (2012) was privatised and the Lloyds Banking Group was part-privatised
in 2013. Most recently,
Royal Mail
has been added to the list, when it was privatised in 2013.

Many of the privatised utilities are also
natural monopolies. With a natural
monopoly, the role of the regulator is to act as a surrogate competitor
to the privatised, natural monopoly. In doing this the regulator can make
up for the missing contestability found with natural monopolies.